Tax on a TSP Transferred to a Roth IRA

TSPs and Roth IRAs both offer tax breaks for retirement savings.

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Thrift savings plans are offered to federal employees and members of the uniformed services to help them save for retirement. If you've left the service, you can take your money with you and consolidate it into an IRA. If you expect to pay a higher tax rate at retirement, a transfer from your TSP to a Roth IRA makes sense because the taxes you pay in the current year will be less than at retirement.

Tax Status of TSP

TSPs offer two types of accounts: traditional TSPs and Roth TSPs. Traditional TSPs provide tax-deferred savings, which means the money in the traditional TSP has never been taxed. Traditional TSP distributions count as taxable income when distributed. Roth TSPs function similarly to Roth IRAs in that the money in the account has already been included as part of your taxable income. Qualified Roth TSP distributions don't count as taxable income when distributed.

Traditional TSP to Roth IRA

When you transfer money from a traditional TSP to a Roth IRA, you have to include the amount of the transfer in your income for the year because it's never been taxed before, and it will not be taxed when you take a qualified distribution from the Roth IRA. For example, if you put $5,000 into a TSP, you get a $5,000 tax deduction. If you didn't have to pay taxes on the conversion to the Roth IRA, you'd be able to take the money out tax-free, never having paid income taxes on it. Therefore, when transferring the money from the traditional TSP to the Roth IRA, you must count that as part of your income for the year and pay taxes on it.

Roth TSP to Roth IRA

When you transfer funds from a Roth TSP to a Roth IRA, you don't incur any additional taxes because you've already paid taxes on the money in the TSP. If you had to pay income taxes on the transfer, you'd be taxed twice on the same money. For example, if you contribute $5,000 to a Roth TSP, that $5,000 is included in your taxable income for the year. When you transfer the money from the Roth TSP to a Roth IRA, that same money isn't taxed a second time.

Tax Rates on Transfers

The amount of tax you pay on your transfer from a traditional TSP to a Roth IRA depends on your income tax bracket. For example, if you fall in the 28 percent tax bracket and you convert $8,000 from a traditional TSP to a Roth IRA, you'll owe an extra $2,240 on your taxes that year. However, watch out if you're at the higher end of an income tax bracket: if your Roth IRA conversion is large enough, it could push some of your income up to the next income tax bracket.